Regulators at both the IRS and the DOL have made it clear that retirement plans must double down on efforts to prevent missing participants so that benefits can be distributed on schedule. Read on for a brief refresh on the related expectations for plan sponsors and suggested action steps for addressing the challenges.
Due Diligence on Missing Participants
A major responsibility of all plan sponsors is ensuring that plan participants receive their benefits on schedule. Missing participants often pose challenges, so it is best to be proactive with efforts to curtail the associated problems. In fact, the Department of Labor (DOL) issued guidance in 2021 aimed at ratcheting up attention to missing participants. Specifically, the Employee Benefits Security Administration (EBSA) instructed retirement plan fiduciaries to:
- Maintain complete and accurate census information.
- Communicate with participants and beneficiaries about their benefit eligibility.
- Implement effective policies and procedures to locate missing participants and beneficiaries.
It’s a good idea to brush up on EBSA’s guidance in three parts, which is available right here: Best Practices; Compliance Assistance; and, Field Assistance Bulletin. Experts at 401k Specialist point out that despite diligent efforts to prevent missing participants, the need to periodically take further action remains, and note:
E-Search accesses multiple information sources, uses proprietary algorithms to construct an optimal result, and handles large search volumes efficiently and at a reasonable cost. Finally—and most importantly—they can provide reliable results. E-searches are most useful in circumstances where:
- Periodic “scrubbing” of all terminated participant addresses is required
- Terminated participants have positive indications of a stale address (ex.—returned mail)
- An e-search is conducted as a prelude to follow-on, more intensive searches
As useful as they are, occasional e-searches may not be enough when more diligent participant searches are indicated. More intensive searches are indicated when:
- Participants are at, or are nearing a distributable event (e.g., attainment of RMD age)
- Participants have uncashed distribution checks
- Participants are of advanced age, or are otherwise believed to be deceased
- A plan is in the process of terminating, and participants are unresponsive
- Very little (or no) participant data is available
An Ounce Of Prevention
Of course it is best to identify missing participants before they are due to receive required minimum distributions (RMDs). The Internal Revenue Service (IRS) requires plan sponsors to follow specific disbursement schedules and Secure 2.0 is ushering in new protocols. Experts share these tips for “reducing the burdens” related to missing participants:
- Promote consolidation into and out of your plan. This reduces the problem of “small accounts” which inevitably spawn a higher percentage of missing participants. Look into the use of auto portabilityand facilitated roll-ins.
- Avoid the use of automatic cash-outs for plan balances below $1,000. This inevitably generates many uncashed checks, which drive more search activity. If you’re not already doing so, consider including sub-$1,000 balances in your plan’s automatic rollover program.
- Hire aprofessional search service. This will reduce your staffing commitment, provide higher-quality results, and produce better documentation of search activities.
Though proactively addressing missing participant challenges requires an investment of time and money, doing so makes sense—especially in the face of the stiff penalties for failing to do so, as Plan Sponsor underscores:
Sponsors must make all possible efforts to find those participants, as directed by IRS guidance and Department of Labor best practices. Failure to do so can lead to the plan losing its favorable IRS tax treatment and could even end in plan disqualification, says Kim Couch, a partner at Verrill Dana…. She advises that plan sponsors should not wait to find any missing participants who are eligible for RMDs until it’s too late to act. “Plan sponsors need to get on it,” Couch says. “They need to get on it now. On the IRS side, you have a qualification issue if you’re not making timely required minimum distributions. If it happens that a participant doesn’t get it, they also receive a 50% excise tax on the amount that they would receive.”
Remember, even the most diligent plan sponsor, following all regulations and best practices, can never fully eliminate the personal risks associated with their duties. That’s why obtaining fiduciary liability insurance is fundamental and enables retirement plan sponsors to protect the businesses and savings they have worked hard to build. Colonial Surety is here to help. As a longstanding and trusted national provider of ERISA fidelity bonds, we’re committed to ensuring that plan sponsors from small and mid-size businesses can afford the protections larger companies put in place. Colonial’s annual premium for fiduciary liability insurance costs less than just one hour with an ERISA lawyer and arms plan sponsors with defense costs and penalty limits up to $1,000,000 in the event of covered lawsuits and regulatory actions. We even include 50,000 of basic cyber liability insurance, lock in multi-year rates and offer installation payments.
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